Ontario Unfairly Strained by $11-Billion ‘Fiscal Gap’

Outdated policies that cause Ontario to turn over roughly $11 billion more to the federal government each year than it receives are placing an unfair strain on the province, a public policy think tank said in a report released Monday.

The study by the University of Toronto’s Mowat Centre points to what it calls the province’s “fiscal gap,” which it blames almost entirely on “inequities in federal spending,” including transfer payments and investments.

Ontario continues to contribute a disproportionate amount to federal coffers, even though it’s no longer wealthier than the average province, the report says.

As a result, its prosperity and quality of life are being undermined, it says.

What was once Canada’s economic engine officially became a “have-not” province — meaning it qualified for the equalization program — in 2008 as its manufacturing sector took a tumble and trade with the U.S. weakened amid the global recession.

“One might assume that, given Ontario’s below average fiscal capacity, it would now be a net recipient of redistribution in the federation, but that turns out not to be the case,” the document reads.

“Canada’s fiscal arrangements have not evolved to reflect changing circumstances. As a result, Ontarians continue to see their federal taxes redistributed away from Ontario on a net basis at a time when the province can ill afford it,” it adds.

The findings are based on fiscal data from 2009, the latest figures available.

The issue is a recurring one for the province, and one that Premier Kathleen Wynne intends to raise with her counterparts at the upcoming Council of the Federation meeting in July, said Intergovernmental Affairs Minister Laurel Broten.

“Ontario has long known that the current system of federal transfers and tax structures disadvantages Ontario,” she said Monday.

The centre’s report, one of several to examine wealth-sharing programs in recent years, “provides further evidence of why we need to modernize our fiscal arrangements in this country,” she said.

Canada’s wealth-sharing programs — and how they affect Ontario, which is battling a deficit of $11.9 billion — often drew criticism from Wynne’s predecessor Dalton McGuinty.

A spokesman for federal Finance Minister Jim Flaherty said Ottawa addressed two of Ontario’s long-standing requests on the matter in 2007 when it moved to per-capita funding for provincial transfers and included a fiscal capacity cap in equalization.

Ontario receives nearly $20 billion a year, including $3.2 billion in equalization, $12 billion and $4.7 billion respectively in health and social transfers, Dan Miles said in an email.

“The record high support for Ontario clearly shows the transfer system has been reformed to treat all provinces — especially Ontario — more equitably than ever before,” he wrote.

But Broten said that while there has been “some movement” when it comes to investments in Ontario, “we have seen a number of decisions made by the federal government that have disadvantaged the province.”

The transfer system includes equalization as well as other payments to support health care and social programs.

Equalization payments are meant to ensure that have-not provinces are able to provide comparable services at taxation levels comparable to those in wealthy provinces.

It notes that 40 per cent of all EI premiums came from Ontario in 2011, but the province only received 33 per cent of income benefits that year despite having an unemployment rate higher than the national average.

Ontario’s annual unemployment rate was 7.8 per cent in 2011 compared with 7.4 per cent for the country.

“These kinds of imbalances were understandable as part of a trade-off when Ontario’s growth and prosperity were facilitated by federal policies that favoured the growth of Ontario’s manufacturing sector, but as circumstances change, our programs, policies, spending decisions and fiscal architecture should keep up,” the document reads.

A 2011 report by the Ontario Chamber of Commerce also suggested Ontario is particularly disadvantaged by the equalization system when it comes to education, health care and child care.